Zhongchao Inc. — FY2023 Form 20-F
Period: Fiscal year ended December 31, 2023. This is an annual report, not a standalone Q4 filing; separate Q4 financial results are not provided. Figures are in U.S. dollars unless stated otherwise. The company reports under U.S. GAAP.
Business context and reporting period
Zhongchao is a Cayman Islands holding company. Its China-based healthcare education, patient-management, internet healthcare and pharmaceutical sales operations are conducted through a variable interest entity (VIE) and contractual arrangements; the company does not own the VIE’s equity. Services include online and onsite medical training, patient-aid program administration and, since 2022, sales of patented drugs.
Key financial metrics
| Metric | FY2023 | FY2022 |
|---|---|---|
| Revenue | $19.43 million | $14.15 million |
| Gross profit / margin | $8.51 million / 43.8% | $6.36 million / 44.9% |
| Operating loss | $13.28 million | $2.95 million |
| Net loss | $11.31 million | $2.82 million |
| Operating cash flow | $54,229 | $(661,740) |
| Investing cash flow | $(3.75) million | $(3.35) million |
| Financing cash flow | $0 | $1.85 million |
| Cash and cash equivalents at year-end | $7.55 million | $11.52 million |
| Working capital at year-end | $16.03 million | $18.54 million |
| Total assets / total liabilities | $24.42 million / $3.38 million | $38.61 million / $5.60 million |
Short-term investments were $5.90 million at year-end, up from $0.52 million. Accounts receivable fell to $2.55 million from $6.77 million; the allowance for credit losses was $2,197, following $1.25 million in bad-debt expense and write-offs during 2023. Total operating lease liabilities were $808,156. The filing does not disclose material interest-bearing borrowings.
Material changes versus FY2022
- Revenue increased 37.3%, principally because patented-drug sales rose to $9.03 million from $1.22 million. Service revenue declined to $10.41 million from $12.94 million.
- Patient-aid project revenue decreased by about $2.29 million; management said it discontinued some lower-margin projects. Service gross margin improved to 50.4% from 44.6%, while drug-sales gross margin fell to 36.2% from 48.4%, attributed primarily to higher purchase costs as the RMB depreciated.
- Net loss widened to $11.31 million. Selling and marketing expense increased to $6.71 million from $2.10 million, including higher advertising, promotion and sales commissions.
- Significant unusual charges included $5.62 million of goodwill impairment and $536,206 of software/intangible impairment related to West Angel, whose results were below expectations. The company also recorded a $1.72 million loss on disposal of property and equipment, following a government-directed building removal.
- Cash declined by $3.97 million during the year. Investing outflows included purchases of short-term investments and property and equipment, and loans to third parties; operating cash flow was only slightly positive.
Outlook, commentary, risks and contingencies
- No specific revenue or earnings guidance is provided. Management states that its current operating plan and resources are expected to cover liquidity needs for at least 12 months from the report date. The company plans to expand brand awareness, course content, user communities and patient-support services, and to develop additional revenue streams.
- The company depends on pharmaceutical customers and NFPs, faces competition and customer concentration, and is exposed to collection risk. One customer represented 13.7% of FY2023 revenue; two customers represented 18.3% and 17.8% of year-end net receivables.
- Material structural and regulatory risks include reliance on VIE contracts that have not been tested in court, uncertainty around PRC laws and required licenses, overseas-listing filing requirements for future financing, and restrictions on moving cash out of China. The filing says no dividends have been paid and none are anticipated in the foreseeable future.
- Class B shares carry 100 votes each versus one vote per Class A share; the CEO-controlled holder had approximately 96.54% of voting power. The company disclosed material weaknesses in financial-reporting controls and concluded disclosure controls were not effective. Remediation efforts include outside consulting, staff training and developing an internal audit function.
- After the reporting period, the company completed a 1-for-10 share consolidation on February 29, 2024 and reported regaining Nasdaq’s minimum-bid-price compliance on March 15, 2024. In March 2024, it purchased a Beijing office for approximately $2.1 million.
- The auditor issued an unqualified opinion on the consolidated financial statements. The auditor did not opine on internal-control effectiveness; management identified material weaknesses. Management reports no legal proceedings expected to have a material adverse effect.
Most important facts for investors to verify
- Whether drug-sale growth is sustainable and can offset declining service revenue, while preserving product and overall margins.
- Cash availability and cash conversion: operating cash flow was $54,229, cash fell by $3.97 million, and cash is subject to PRC transfer and conversion restrictions.
- Collectability of receivables, customer concentration and the adequacy of credit-loss provisions after substantial write-offs.
- Whether West Angel’s impairment and property-removal charges are fully reflected, and whether further impairment or related costs arise.
- Progress in remediating the financial-reporting control weaknesses and any subsequent Nasdaq listing-compliance developments.
- VIE enforceability, required operating licenses and any CSRC filing obligations for future offerings or financing.